ONLINECO 

Chapter 14. Principles of Economics. Firms in Competitive Markets. Exercises 1- 6. Gregory Mankiw.

 

1. Many small boats are made of fiberglass, which is derived from crude oil. Suppose that the price of oil rises.a. Using diagrams, show what happens to the costcurves of an individual boat-making firm and tothe market supply curve. b. What happens to the profits of boat makers in theshort run? What happens to the number of boatmakers in the long run?

 

2. You go out to the best restaurant in town and order a lobster dinner for $40. After eating half of the lobster, you realize that you are quite full. Your date wants you to finish your dinner because you can’t take it home and because “you’ve already paid for it.” Whatshould you do? Relate your answer to the material inthis chapter.

 

3. Bob’s lawn-mowing service is a profit-maximizing,competitive firm. Bob mows lawns for $27 each. Histotal cost each day is $280, of which $30 is a fixed cost. He mows 10 lawns a day. What can you say aboutBob’s short-run decision regarding shutdown and hislong-run decision regarding exit?

 

4. Consider total cost and total revenue given in the followingtable: a. Calculate profit for each quantity. How much should the firm produce to maximize profit? b. Calculate marginal revenue and marginal cost for each quantity. Graph them. (Hint: Put the points between whole numbers. For example, the marginal cost between 2 and 3 should be graphed at 2½.) At what quantity do these curves cross? How does this relate to your answer to part (a)? b. Calculate marginal revenue and marginal cost for each quantity. Graph them. (Hint: Put the points between whole numbers. For example, the marginal cost between 2 and 3 should be graphed at 2½.) At what quantity do these curves cross? How does this relate to your answer to part (a)? c. Can you tell whether this firm is in a competitive industry? If so, can you tell whether the industry is in a long-run equilibrium?

 

5. Ball Bearings, Inc. faces costs of production as follows: a. Calculate the company’s average fixed costs, average variable costs, average total costs, and marginal costs at each level of production. b. The price of a case of ball bearings is $50. Seeing that he can’t make a profit, the chief executive officer (CEO) decides to shut down operations. What is the firm’s profit/loss? Was this a wise decision? Explain. c. Vaguely remembering his introductory economics course, the chief financial officer tells the CEO it is better to produce 1 case of ball bearings, because marginal revenue equals marginal cost at that quantity. What is the firm’s profit/loss at that level of production? Was this the best decision? Explain.

 

6. Suppose the book-printing industry is competitive and begins in a long-run equilibrium.a. Draw a diagram showing the average total cost,marginal cost, marginal revenue, and supply curveof the typical firm in the industry. b. Hi-Tech Printing Company invents a new process that sharply reduces the cost of printing books. What happens to Hi-Tech’s profits and the price of books in the short run when Hi-Tech’s patent prevents other firms from using the new technology? c. What happens in the long run when the patent expires and other firms are free to use the technology?